Ten years on from the financial crisis
Ten years on from the collapse of Lehman Brothers and the impact of the financial crisis, and much has changed in the financial and banking sector. There are powerful examples of positive change that will be necessary if we’re to transition to a sustainable, new economy. But too little has been done, too slowly to meet the scale of the challenge. We are now at a stage where that simply has to change.
The International Panel on Climate Change’s 2018 report argues forcefully that it is now clear that a 1.5 degree increase in temperature from pre-industrial levels is the threshold beyond which we should not go. That means rapid and far-reaching changes to how we go about our daily lives. And it has profound implications for what we choose to finance as banks, and what we choose not to.
The urgency of a challenge like this requires real choices. It requires banks, like Triodos, to move from being niche players to become front-runners of a mainstream where all banks choose to finance enterprise committed to a new, low carbon and sustainable economy. There should be no ‘dark’ green or ‘light’ green banking anymore; there should just be green banking. And it should be the norm.
Has values-based banking’s time finally come?
Triodos Bank has always advocated financing the right things in a responsible way. For us that means a well-capitalised, financially sound bank; one that only lends to and invests in sustainable entrepreneurs and their enterprises. There is some evidence that the example that we, and others, have set is being genuinely embraced by others.
During 2018 a coalition of national central banks made an explicit connection between our climate and the stability of the financial system. This has important consequences. It forces real choices about what to finance, and what not. And it demands a clear understanding of the actual impacts of a financial institution, and the decisions it makes, on the climate.
Better decision-making needs better insight: more specifically this means, for example, that banks and others need to assess and understand the carbon footprint of their loans and investments. Triodos Bank has participated in the Platform for Carbon Accounting Financials (PCAF) since its launch at the Paris Climate Conference in 2015. PCAF has developed a methodology to make just these assessments. We report on the results of this work, for the first time, in this annual report. Such is the power of this idea that a US-based version of PCAF has been launched under the leadership of our fellow Global Alliance for Banking on Values (GABV) member, Amalgamated Bank.
And there are other examples of Triodos Bank influencing the wider financial system, from across our European network. They include our active participation in the All Party Parliamentary Group on Business Banking in the UK, which aims to build a fairer banking system in the UK.
These developments are to be celebrated and encouraged. They are not, however, enough.
Our financial system, and our banks, must change. We failed to take the opportunity to reinvent established ownership structures and governance following the financial crisis. In much of the world we have returned to a shareholder-driven model far too quickly. It is our firm conviction that it is simply not possible to do the right thing as a bank – financing the real economy in a responsible way – and deliver double-digit returns. These profits have once again become the norm. In the immediate aftermath of the financial crisis many banks advocated ‘fair returns’, not the excessive returns that had in many ways driven the decisions that lead to the crisis itself. But those voices have faded. We need to hear them again and they need to result in fundamental changes in our banks.
From shareholder to stakeholder models
A shift from shareholder to stakeholder priorities, coupled with changes in regulation, can provide a powerful force for the transition to a sustainable economy.
Building on our work in 2017, Triodos Bank has advocated just such a change. Via meetings with regulators and government, public speaking opportunities, white papers, and through our networks, we have argued that the regulators insist on higher capital requirements if they continue to finance ‘brown’ assets. We believe these assets bring inherent risks with them, given the transition to a sustainable economy that is already underway. Higher capital requirements would be a disincentive to banks to continue to finance fossil fuels, a prerequisite for our economy to decarbonise. Banks need to stop financing brown assets, including fossil fuels. And they need to do it now. In The Netherlands Triodos Bank has played a pivotal role helping to develop a Climate Agreement that puts meaningful national carbon emission targets in place, including a 49% reduction of emissions from the financial sector by 2030.
We are not alone in arguing for these changes. We joined with mainstream banks to develop the UN Principles for Responsible Banking which were launched in Paris in November 2018. The principles are designed to encourage banks – particularly those who are at the start of the journey – to accelerate their transition towards aligning to society’s needs and sustainability challenges such as the Paris Climate Agreement and the United Nations Sustainable Development Goals (SDGs). They call for all signatory banks to address the impacts that make the most difference, set public targets and be fully transparent and accountable about progress. And they call on banks to work together with clients and stakeholders to address sustainability challenges. We hope that initiatives like these will help to accelerate the cultural change that is needed within the wider banking system.
Products with a purpose
These goals have translated into practical action throughout 2018 at Triodos Bank. For the third year in a row, Triodos Bank was the leading arranger of renewable energy deals in Europe, financing more deals than anyone else. We further developed a green mortgage in The Netherlands, incentivising homeowners to make significant changes to the environmental performance of their homes. And we have noticed other banks adopting similar approaches, discounting loans to sustainable enterprise. While in the UK, our crowdfunding platform – the first of its kind from a regulated bank in Britain – used the collective power of community to finance a range of innovative sustainable enterprises.
One example is Fishtek Marine, a company that has successfully developed products that protect marine species from unintentional capture and injury as well as increasing catch rates for fishing fleets. Given that fishing nets and lines are responsible for the deaths of over 300,000 dolphins, porpoises and whales, 300,000 seabirds and 250,000 turtles every year, companies like these are increasingly important if we’re to address key global challenges.
Triodos Bank is a mid-size, international bank, which is growing at a steady pace. More complexity and increased regulation due to this growth, as well as developments in the financial sector, bring additional challenges to the organisation.
These challenges require a strategic response which reflects the enhanced importance of sound risk management and compliance at group level. As a result, and in close consultation with the Supervisory Board, we have concluded that it is necessary to enhance the Executive Board (EB) with the addition of a Chief Risk Officer (CRO). Creating a CRO role at Executive Board oversight level will ensure that the critical areas of risk management and compliance are represented at the appropriate level for strategic decision making. This takes the total number of Executive Board members to four. The Supervisory Board has decided accordingly and is expected to announce a candidate for this role in due course.
This change will allow the Chief Financial Officer (CFO) to focus fully on the financial strategy of the bank and to address in more depth the challenge of the increasing role of data quality in relation to financial management and internal and external reporting.
Steady growth and organisational complexity mean the Executive Board is increasingly focused on a more strategic and oversight role. To address these developments adequately, the Executive Board has created a Banking Committee, consisting of the managing directors of the branches and relevant head office directors. The Banking Committee will assume responsibility for the business change agenda.
To further strengthen the alignment between the branches, the Executive Board also intends to appoint a Director of Banking at Group level. This role is to coordinate and steer the operational and business development of the banking branches from a Group perspective. This will enable us to act more as one bank, delivering stable profitably in a more effective, efficient and impactful way. The Director of Banking is a member of the Banking Committee.
Triodos Bank is active in an industry that is changing ever more quickly. Shifting customer expectations, new digital possibilities and increasing regulatory demands affect us in the same way as other banks. In order to become faster and better at delivering value for our customers and positive impact for the communities we serve, as well as improving efficiency and control, we have introduced a new way of working.
A sustainable strategy fit for a changing world
2018 was a year in which we responded to a rapidly changing external environment by revising our strategy. The continuing higher costs of meeting regulation and lower margins because of low interest rates and competition for personal and business customers (either solely on price or from banks eager to lend to attractive ‘sustainable’ businesses) put pressure on Triodos Bank’s profitability. To address this, we have developed new ideas, accelerated existing ones and made difficult choices about things we will no longer do, such as discontinuing funds that have been unable to reach sufficient scale. And we have identified key themes we will prioritise in the coming three years – social inclusion, food and agriculture and energy and climate.
We will continue to focus our energies on developing and delivering products that help deliver our purpose, where there is a clear sustainable element to, or outcome from, a product. And we will create multidisciplinary teams of co-workers from across the group to deliver work more efficiently and effectively by adopting an agile way of working.
We will base much of our future activity on a modern online environment that puts relationships first. During the year, we delivered a new online ecosystem. We launched new apps, online banking services, and new websites in all our branches and Triodos Investment Management. This year’s online annual report also reflects our new online signature. We welcome your views on what you like and want to see improve.
Financing the transition: achievements and challenges
Triodos Bank has been working with regulators for over a year to ensure the necessary regulatory and legal frameworks are in place to continue providing services after the withdrawal of the UK from the European Union (Brexit). To ensure Triodos Bank can continue to operate in the UK, a different legal structure is required. This means creating a new subsidiary company wholly owned by Triodos Bank N.V., subject to regulatory approvals and any unforeseen circumstances.
We also made hard decisions to stop some parts of our operations, including closing the Culture and Sustainable Real Estate Funds. The Funds are close to the values of Triodos Bank but have not been able to develop to the scale required to enable them to remain both profitable and deliver significant impact. While the funds have closed the culture and sustainable real estate sector will continue to be an important area for our finance via Triodos Bank’s lending activity in our branches.
To deliver more positive impact we also prototyped a new way to manage and report on our impact during the year. Harnessing the input of academics and practitioners from across the Triodos Bank network we have developed tools which, from the start of 2019, will provide more relevant data about the impact we, and our customers, make in the world. This will help us to improve our decision making from an impact, risk and return perspective. And it will provide practical ways to increase the impact we make together. We will report on the outcomes of this work – including more and better information about our contribution to the sustainable development goals – in the 2019 annual report.
These developments have happened against the backdrop of the urgent need for lasting sustainable change. The time for prevarication is over. We need to make choices. In the end, for the banking sector and for industry more widely, this means a joint and joined up effort. Because a sustainable approach, that puts money in the service of people and not the other way around, has to happen now as part of an economically viable future.
Triodos Bank will continue to develop its European banking activities through the existing branches and Triodos Finance, an intermediary for Triodos Bank N.V. in France.
To deliver more positive impact for the individuals and communities we serve, building on our unique experience as Europe’s only pan-European sustainable bank, we need to operate more as one bank. By doing so, we will improve our service to sustainable enterprises, improve efficiency and we aim to maintain a stable net profit.
Triodos Bank wants to act beyond its immediate boundaries. We will develop new strategic partnerships and we will start offering approved sustainable investment funds from other parties on our own platform in addition to the Triodos Investment Funds, starting in 2019.
To become less dependent on interest income, we will focus on growing our fee income, mainly through the expansion of our Triodos Investment Management activities. We anticipate continuing upward pressure on our cost base due to ongoing regulatory requirements. We recognise that these obligations, that come with the license to operate a bank, are important. In particular the increased responsibility of banks for customer due diligence and transaction monitoring require attention and investment, to both comply and stay fully up-to-date with new developments. Triodos Bank has shortcomings in that respect and has received an instruction from the regulator to improve its processes for customer due diligence and monitoring of customer transactions. We expect to be able to comply with the instruction from The Dutch Central Bank (DNB) in the required timeframe.
Like the financial sector in general, Triodos Bank faces a serious challenge with low interest rates and increasing regulatory costs. And yet, the opportunities for Triodos Bank as a frontrunner in responsible finance are significant. With a controlled growth strategy, generating maximum impact and a stable profit, we expect a healthy development in 2019 and beyond.
Zeist, 20 March 2019
Triodos Bank Executive Board
Peter Blom, Chair
At the 2018 Annual General Meeting (AGM), Pierre Aeby announced his decision to retire at the following AGM in May. So this will be the last Executive Board chapter in the annual report that Pierre co-authors.
Pierre’s career with Triodos Bank spans more than 20 years. He started as Managing Director of our Belgian branch in 1998 becoming a member of the Executive Board two years later. Since then Triodos Bank’s positive impact in the world has increased enormously. The organisation grew from approximately 70 co-workers to more than 1,400, and its total assets under management increased from approximately EUR 400 million to EUR 15.5 billion.
During his time at the bank Pierre has actively contributed to the growth strategy of the group and to the development of a high-quality lending activity, building a solid bank, while always maintaining great attention to a well-balanced impact risk return profile. Over the last years, Pierre focused on the strengthening of the finance and risk management organisation to cope with the group’s growing size and complexity and to deal with increasing regulatory requirements after the financial crises.
There will be other opportunities to thank Pierre for his contribution, but we want to mark this report with a sincere and heartfelt thank you, on behalf of the entire co-worker group and our Boards, for his enormous contribution to Triodos Bank’s development.